Fixed Income Quarterly—Infrastructure
Page 3
Table 1: Infrastructure Sector - Ratings Comparison
Senior Unsecured Credit Ratings - Infrastructure
DBRS S&P Moody's
Issuer Rating Outlook Rating Outlook Rating Outlook
407 International Inc.1
Aeroports de Montreal1
British Columbia Ferry Services Inc.1
Edmonton Regional Airports Authority1
Greater Toronto Airports Authority (GTAA)1 Leisureworld Senior Care LP1
NAV CANADA1
Ottawa Macdonald-Cartier International Airport Authority1 Teranet Holdings LP1
A Stable AH Stable A Stable AH Stable A Stable A Stable AA Stable AH Stable BBB Stable
A Stable nr
nr A1 AA- Stable nr A Positive A1
A Stable A1 A- Negative nr
Stable
Stable Stable
Stable Stable
AA
A+
BBB+
Stable Aa2
Stable Aa3 Negative nr
Vancouver International Airport Authority AAL Stable AA Stable nr
Winnipeg Airports Authority Inc.1 nr A Stable A2 Stable
As of March 31, 2014
1 Ratings are those of senior secured debt Source: DBRS, Moody’s, S&P
supply. Also, we believe it is possible spreads for some issuers in the Infrastructure sector may eventually trade on top of, or through, certain provinces.
We are maintaining our Market Perform sector recommenda- tion for Infrastructure – Transportation given our expectation for range-bound yields over the near term and our belief that investors will prefer product with greater spread in that environment.
Our preferred issuer in the Infrastructure sector remains 407 International, or more specifically 407 bonds issued under the older covenant structure. Part of our justification is predicated upon relative valuation, wherein GTAA currently trades three basis points through 407 across the curve. Historically, this relationship has seen GTAA trade well back of 407. While we laud GTAA’s annual traffic performance during 2013, the airport authority’s compressing margins juxtapose starkly to 407, which has demonstrated the ability to generate strong and consistent revenue growth, despite a moderate traffic perform- ance, due to annual toll rate increases and the high inelasticity of demand for the highway.
Key Themes
Traffic Growth Remains Challenged – As a general rule, we expect traffic growth for most issuers in the Infrastructure sec- tor to be roughly in line with GDP growth. We believe traffic growth will remain challenged over the near to medium term as sovereign risk in Europe and U.S. economic woes create headwinds for global economic growth. At the same time, key credit strengths of many Infrastructure issuers include an autonomous rate-setting ability and mandate to operate on a
breakeven basis, which mitigate some of the financial impact of slower traffic growth.
During fiscal Q1/14, air traffic for NAV CANADA rose by 2.5%, which was roughly in line with its full-year guidance of 2.4%. As has been our position for some time, we believe air traffic growth for NAV CANADA will likely remain under pressure over the near term as discretionary spending is be- ing hampered across the globe due to sovereign problems and ongoing austerity in Europe, as well as economic uncertainty in the U.S. and Asia. We also believe underlying geopolitical discord in the Middle East, despite several recent examples of entente in the region, may keep upward pressure on oil prices and hence stifle traffic growth.
Passenger traffic for GTAA continued to experience demon- strable improvement during Q4/13, posting its strongest quar- terly growth rate of the year at 4.6% to 8.5 million, compared to increases of 4.1%, 3.9% and 1.0% through the first three quarters of 2013. What’s more, the pace of improvement re- mained well above the airport authority’s compound annual growth rate of 1.7% between 2000 and 2013.
Unlike the first three quarters of 2013, the pace of growth during Q4/13 was driven by the international segment, which expanded by 6.0% to 2.7 million. With growth of only 1% in Q4/12, the hurdle rate this year was less challenging; neverthe- less, a 6% level represents a strong result and perhaps an early indication that the cancellation of international services and focus on load factors that plagued the 2012 results had fully run its course. For its part, GTAA noted that its long-term plan is to focus on international activity, building upon the strong growth it has experienced already to Asia, the Middle East and Latin America, which is driven by rising economic and